A couple of weeks ago, I told you that it is time to focus on money because succumbing to Covid is no longer very likely. Creating a debt inventory is the first step to taking a decisive step towards improving your money situation over the next year.
You may already know that we, at The Money Principle, have a pragmatic attitude to debt: we believe paying off debt is the best thing you could do for your money and your life, but we will never patronise you for having debt. We believe that having debt is human but paying off debt is divine.
You may also remember that we had £100,000 worth of consumer debt and paid it all off in three years. Since early 2013 we have lived debt-free, and while our life has not been without problems, I loved every second of it.
Creating an inventory of your debt is essential preparation for paying it off. Knowing how much debt you have, who your creditors are, how much interest you pay, and what proportion of your monthly income goes towards debt payment provides the foundation for all kinds of decisions about how to tackle it.
In my earlier post, I set out the money inventory rules I urge you to complete.
I also promised that I’d do the audit with you. This post is the first of my posts reporting on The Money Principle Money Audit 2020.
Debt inventory step one: Make a list of creditors
It is easy for me:
We have one creditor, and it is our mortgage provider.
I told you that we had lived consumer debt-free since February 2013, right?
It means that:
- We don’t have any credit card debt.
- We don’t have a car loan.
- We don’t have remodelling loans and such.
- We don’t owe friends and family.
Our only debt is our mortgage. I won’t mention numbers here because my numbers always sound insane. Suffice to say that our mortgage is less than 30% of the house’s value and that we have liquid investments to pay off most of it should we decide to do so.
Debt inventory step two: Monthly mortgage payment
Our monthly mortgage payment is approximately 9% of our monthly income – this is well below the average UK households pay on mortgages.
Debt inventory step three: The annual interest rate of debt
Our mortgage comes with extremely low interest – below 2% annually.
Why are we not fussed about paying off our mortgage?
There was a time when I would have put every penny we have on the mortgage and pay it as soon as possible
This time is past.
We are not fussed about paying off our mortgage because:
- The possibility to do that is there should we decide to do it.
- Our mortgage is the lowest interest borrowing one could get.
- Our investments do much better than mortgage interest.
- We like keeping cash for opportunities and crises.
- We may decide to move in the next 20 months.
Yep, I know – I promised I’d work with you on the money audit and cheated at the first opportunity by having it easy with the debt inventory.
If, like me, you put the hard work around debt years ago and have been enjoying a life free of consumer debt for some time, I can only say ‘well done’.
If you still have lingering consumer debt, do the debt inventory properly and make up your mind about:
- Are you willing to continue living with debt?
- Are you ready to commit to paying off all of it?
- Do you have what it takes to live debt-free?